Production Operation
Management
Junaid Zamir
SP06-BB-0010
Chapter 1 –
Operations and
Productivity
2
What Is Operations Management?
Production is the creation of goods and
services
Operations management (OM) is the set of
activities that creates value in the form of
goods and services by transforming inputs
into outputs
Organizing to Produce Goods and
Services

Essential functions:
 Marketing – generates demand
 Production/operations – creates the product
 Finance/accounting – tracks how well the
organization is doing, pays bills, collects the
money
4
Why Study OM?

OM is one of three major functions (marketing,
finance, and operations) of any organization

We want (and need) to know how goods and services
are produced
We want to understand what operations managers do
OM is such a costly part of an organization


5
What does it covers
Basic Management Functions





Planning
Organizing
Staffing
Leading
Controlling
areas it covers

Design of goods and services
 What good or service should we offer?
 How should we design our products and
services?

Managing quality
 How do we define quality?
 Who is responsible for quality?
7
areas it covers


Process design
 What process will the product require?
 What equipment and technology is necessary
for these processes?
Location strategy
 Where should we put the facility?
 On what criteria should we base the location
decision?
8
areas it covers


Layout strategy
 How should we arrange the facility?
 How large must the facility be to meet our plan?
Human resources and job design
 How do we provide a reasonable work
environment?
 How much can we expect our employees to
produce?
9
areas it covers


Supply chain management
 Should we make or buy this component?
 Who are our suppliers and who can integrate into
our e-commerce program?
Inventory, material requirements planning, and JIT
 How much inventory of each item should we have?
 When do we re-order?
10
New Trends in OM







Global focus
Just-in-time performance
Supply chain partnering
Rapid product development
Mass customization
Empowered employees
Environmentally sensitive production
11
Productivity Challenge
Productivity is the ratio of outputs (goods and
services) divided by the inputs (resources such as
labor and capital)
12
Measurement Problems
 Quality may change while the quantity of
inputs and outputs remains constant
 External elements may cause an increase
or decrease in productivity
13
Productivity Variables
 Labor - contributes 10% of the annual
increase
 Capital - contributes about 38% of the
annual increase
 Management - contributes about 52%
of the annual increase
14
Chapter 4 –
Forecasting
15
What is Forecasting?



Its is the art and science of predicting a future events.
It uses historical data to predict future.
It deals in areas of
 Production
 Inventory
 Personnel's
16
Forecasting Time Horizons

Short-range forecast
 Generally for less than 3 months
 Used for planning purchases, job scheduling

Medium-range forecast
 For 3 months to 3 years
 Sales and production planning, budgeting

Long-range forecast
 3+ years
 New product planning, research and development
17
Distinguishing Differences

Medium/long range forecasts deal with more
comprehensive issues and support management
decisions regarding planning and products, plants
and processes

Short-term forecasts tend to be more accurate than
longer-term forecasts
18
Product Life Cycle
Introduction
Product design and
development critical
Frequent product
and process design
changes
Process
modifications
High production
costs
Limited models
Growth
Forecasting critical
Product and
process reliability
Competitive
product
improvements and
options
Increase ability
Maturity
Decline
Standardization
minor changes
Increasing
stability of
process
Product
improvement and
cost cutting
Little product
differentiation
Cost
minimization
commonality
Research &
development
19
Types of Forecasts

Economic forecasts
 Address business cycle – inflation rate, money
supply, housing starts, etc.

Technological forecasts
 Predict rate of technological progress
 Impacts development of new products

Demand forecasts
 Predict sales of existing products and services
20
Forecasting Approaches
Qualitative Methods

Used when situation is vague and little data exist
 New products
 New technology

Involves intuition, experience
 e.g., forecasting sales on Internet
21
Forecasting Approaches
Quantitative Methods


Used when situation is ‘stable’ and historical data
exist
 Existing products
 Current technology
Involves mathematical techniques
 e.g., forecasting sales of color televisions
22
Qualitative Approaches

Delphi method
 Panel of experts make forecasts

Sales force composite
 Forecasting technique based on salespersons
estimates of expected sales.

Consumer Market Survey
 Input from potential customers
23
Quantitative Approaches

Naive approach

Assumes demand in next period is the same as
demand in most recent period

Moving averages

It is a series of airthmatic means used to monitor
little or no trend

Weighted moving average

Used when trend is present
24
Exponential Smoothing



Form of weighted moving average
 Weights decline exponentially
 Most recent data weighted most
Requires smoothing constant (α)
 Ranges from 0 to 1
 Subjectively chosen
Involves little record keeping of past data
25
Exponential Smoothing
New forecast =
Last period’s forecast
+ a (Last period’s actual demand
– Last period’s forecast)
Ft = Ft – 1 + a(At – 1 - Ft – 1)
where
Ft = new forecast
Ft – 1 = previous forecast
a = smoothing (or weighting)
constant (0 ≤ a ≤ 1)
26
Time Series Forecasting
Forecasting obtained by observing response
variable at regular time periods
27
Trend Component



Persistent, overall upward or downward
pattern
Changes due to population, technology, age,
culture, etc.
Typically several years duration
28
Seasonal Component



Regular pattern of up and down fluctuations
Due to weather, customs, etc.
Occurs within a single year
29
Cyclical Component




Repeating up and down movements
Affected by business cycle, political, and economic
factors
Multiple years duration
Often causal or
associative
relationships
0
5
10
15
20
30
Random Component



Unsystematic, fluctuations
Due to random variation or unforeseen events
Short duration and
nonrepeating
M
T
W
T
F
31
Chapter 5 –
Design of Goods
and Services
32
Product Decision




The good or service the organization provides
society
Top organizations typically focus on core products
Customers buy satisfaction, not just a physical good
or particular service
Fundamental to an organization's strategy with
implications throughout the operations function
33
Product Strategy Options
 Differentiation
 Shouldice Hospital
 Low cost
 Mobile Phones
 Rapid response
 Wal-mart
34
Product Life Cycle
Introduction
Product design and
development critical
Frequent product
and process design
changes
Process
modifications
High production
costs
Limited models
Growth
Forecasting critical
Product and
process reliability
Competitive
product
improvements and
options
Increase ability
Maturity
Decline
Standardization
minor changes
Increasing
stability of
process
Product
improvement and
cost cutting
Little product
differentiation
Cost
minimization
commonality
Research &
development
35
New Product Opportunities
1.
Understanding the customer
2.
Technological change
3.
Political/legal change
4.
Market practice, professional standards, suppliers,
distributors
5.
Developing new products faster can result in a
competitive advantage
36
Quality Function Deployment





Identify customer wants
Identify how the good/service will satisfy customer
wants
Relate customer wants to product hows
Evaluate competing products
Compare performance to desirable technical
attributes
37
Manufacturability and
Value Engineering

Benefits:
 Reduced complexity of products
 Additional standardization of products
 Improved functional aspects of product
 Improved job design and job safety
 Improved maintainability (serviceability) of the
product
 Robust design
38
Issues for Product Development







Robust design
Modular design
Computer-aided design (CAD)
Computer-aided manufacturing (CAM)
Virtual reality technology
Value analysis
Environmentally friendly design
39
Defining The Product
 First definition is in terms of functions
 specifications are developed during the
design phase
 Manufactured products will have an
engineering drawing
 Bill of material (BOM) lists the components
of a product
40
Product Documents

Engineering drawing
 Shows dimensions

Bill of Material
 Lists components, quantities and where used
 Shows product structure
41
Service Design

Service typically includes direct interaction with the
customer
 Increased opportunity for customization


Reduced productivity
Cost and quality are still determined at the design
stage
 Delay customization

Modularization

Reduce customer interaction, often through
automation
42
Chapter 6 –
Managing Quality
43
Defining Quality
The totality of features and
characteristics of a product or
service that bears on its ability to
satisfy stated or implied needs
American Society for Quality
44
Quality and Strategy
 Managing quality supports
differentiation, low cost, and
response strategies
 Quality helps firms increase
sales and reduce costs
 Building a quality organization is
a demanding task
45
The Flow of Activities
Organizational Practices
Leadership, Mission statement, Effective operating
procedures, Staff support, Training
Yields: What is important and what is to be
accomplished
Quality Principles
Customer focus, Continuous improvement, Benchmarking,
Just-in-time, Tools of TQM
Yields: How to do what is important and to be
accomplished
Employee Fulfillment
Empowerment, Organizational commitment
Yields: Employee attitudes that can accomplish
what is important
Customer Satisfaction
Winning orders, Repeat customers
Yields: An effective organization with
a competitive advantage
46
Different Views
 User-based – better performance, more
features
 Manufacturing-based – conformance to
standards, making it right the first time
 Product-based – specific and measurable
attributes of the product
47
Implications of Quality

Company reputation
 Perception of new products

Employment practices

Supplier relations

Product liability
 Reduce risk

Global implications
 Improved ability to compete
48
Key Dimensions of Quality




Performance
Features
Reliability
Conformance





Durability
Serviceability
Aesthetics
Perceived quality
Value
49
Costs of Quality
 Prevention costs - reducing the potential
for defects
 Appraisal costs - evaluating products,
parts, and services
 Internal failure - producing defective parts
or service before delivery
 External costs - defects discovered after
delivery
50
TQM
Total Quality is a description of the culture,
attitude and organization of a company that
strives to provide customers with products and
services that satisfy their needs. It covers entire
organization, from supplier to customer
Requires commitment by managements toward
excellence in all aspects of products and
services that are important to the customer
51
Seven Concepts of TQM







Continuous improvement
Six Sigma
Employee empowerment
Benchmarking
Just-in-time (JIT)
Taguchi concepts
Knowledge of TQM tools
52
Continuous Improvement

Represents continual improvement of all
processes

Involves all operations and work centers
including suppliers and customers
 People, Equipment, Materials, Procedures
53
Six Sigma
 Two meanings
 Statistical definition of a process that is
99.9997% capable, 3.4 defects per million
opportunities (DPMO)
 A program designed to reduce defects,
lower costs, and improve customer
satisfaction
54
Employee Empowerment

Getting employees involved in product and process
improvements

Techniques
 Build communication networks
that include employees
 Develop open, supportive supervisors
 Move responsibility to employees
55
Quality Circles



Group of employees who meet regularly to
solve problems
Trained in planning, problem solving, and
statistical methods
Very effective when done properly
56
Benchmarking
 Determine what to
benchmark
 Form a benchmark team
 Identify benchmarking partners
 Collect and analyze benchmarking
information
 Take action to match or exceed the
benchmark
57
Just-in-Time (JIT)
Relationship to quality:
 JIT cuts the cost of quality
 JIT improves quality
 Better quality means less inventory and
better, easier-to-employ JIT system
58
Taguchi Concepts
 Engineering and experimental design
methods to improve product and process
design
59
Tools of TQM

Tools for Generating Ideas
Check sheets
Scatter diagrams
Cause-and-effect diagrams

Tools to Organize the Data
Pareto charts
Flowcharts

Tools for Identifying Problems
Histogram
Statistical process control chart
60
Inspection



Involves examining items to see if an item is
good or defective
Detect a defective product
 Does not correct deficiencies in process
or product
 It is expensive
Issues
 When to inspect
 Where in process to inspect
 It is necessary for both services and good
industry.
61
Chapter 11 –
Supply Chain
Management
62
The Supply Chain
Supply chain management is the integration of the
activities that procure materials and services,
transform them into intermediate goods and the
final product, and deliver them to customers
63
Supply Chain Management
1. Transportation vendors
2. Credit and cash transfers
3. Suppliers
4. Distributors
5. Accounts payable and receivable
6. Warehousing and inventory
7. Order fulfillment
8. Sharing customer, forecasting, and
production information
64
Make-or-Buy Decisions
Reasons for Making
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Maintain core competence
Lower production cost
Unsuitable suppliers
Assure adequate supply (quantity or delivery)
Utilize surplus labor or facilities
Obtain desired quality
Remove supplier collusion
Obtain unique item that would entail a prohibitive
commitment for a supplier
Protect personnel from a layoff
Protect proprietary design or quality
Increase or maintain size of company
65
Make-or-Buy Decisions
Reasons for Buying
1.
Frees management to deal with its core
competence
2. Lower acquisition cost
3. Preserve supplier commitment
4. Obtain technical or management ability
5. Inadequate capacity
6. Reduce inventory costs
7. Ensure alternative sources
8. Inadequate managerial or technical resources
9. Reciprocity
10. Item is protected by a patent or trade secret
66
Outsourcing
 Transfers traditional internal
activities and resources of a firm to
outside vendors
 Firms outsource information
technology, accounting, legal,
logistics, and production
67
Supply Chain Strategies
 Negotiating with many suppliers
 Long-term partnering with few
suppliers
 Virtual companies that use
suppliers on an as needed basis
68
Vertical Integration
Vertical Integration
Raw material (suppliers)
Backward integration
Current transformation
Forward integration
Examples of Vertical Integration
Iron ore
Silicon
Farming
Automobiles
Integrated circuits
Flour milling
Distribution systems
Circuit boards
Dealers
Computers Watches
Calculators
Steel
Finished goods (customers)
Baked goods
Figure 11.2
69
Virtual Companies
 Rely on a variety of supplier
relationships to provide services on
demand
 Fluid organizational boundaries that
allow the creation of unique enterprises
to meet changing market demands
 Exceptionally lean performance, low
capital investment, flexibility, and speed
70
Vendor Selection
 Vendor evaluation
 Find potential vendors
 Determine the likelihood of them
becoming good suppliers
 Vendor Development
 Training
 Engineering and production help
 Establish policies and procedures
71
Vendor Selection
 Negotiations
 Cost-Based Price Model - supplier
opens books to purchaser
 Market-Based Price Model - price
based on published, auction, or
indexed price
 Competitive Bidding - used for
infrequent purchases but may make
establishing long-term relationships
difficult
72
Distribution Systems

Trucking
 Moves the vast majority of
manufactured goods

Railroads
 Capable of carrying large loads

Airfreight
 Fast and flexible for light loads


May be expensive
Waterways
 Typically used for bulky, low-value
cargo
73
Distribution Systems
 Pipelines
 Used for transporting oil, gas,
and other chemical products
74
Chapter 12 –
Inventory Management
75
Inventory
 One of the most expensive assets
of many companies representing as
much as 50% of total invested
capital
 Operations managers must balance
inventory investment and customer
service
76
Functions of Inventory
1. To separate various parts of the production
process
2. To save firm from fluctuations in demand and
provide a stock of goods that will provide a
selection for customers
3. To take advantage of quantity discounts
4. To hedge against inflation
77
Types of Inventory
 Raw material
 Purchased but not processed
 Work-in-process
 Undergone some change but not completed
 A function of cycle time for a product
 Maintenance/repair/operating (MRO)
 Necessary to keep machinery and processes
productive
 Finished goods
 Completed product awaiting shipment
78
ABC Analysis
ABC analysis is a business term used to define
an inventory categorization technique often used
in material management.
Analysis of a range of items which have different
levels of significance and should be handled or
controlled differently.
79
ABC Analysis

When carrying out an ABC analysis, inventory items
are valued with the results then ranked.

"A class" inventory will typically contain items
that account for 80% of total value, or 20% of
total items.

"B class" inventory will have around 15% of
total value, or 30% of total items.

"C class" inventory will account for the
remaining 5%, or 50% of total items.
80
Record Accuracy
 Accurate records are a critical ingredient
in production and inventory systems
 Allows organization to focus on what is
needed
 Necessary to make precise decisions
about ordering, scheduling, and shipping
 Incoming and outgoing record keeping
must be accurate
 Stockrooms should be secure
81
Holding, Ordering, and Setup Costs

Holding costs - holding cost is money spent to
keep and maintain a stock of goods in storage
(rent, space, insurance and security)

Ordering costs - the costs of placing an order
and receiving goods

Setup costs - cost to prepare a machine or
process for manufacturing an order
82
Cycle Counting
 Items are counted and records updated
on a periodic basis
 Often used with ABC analysis
to determine cycle
 Has several advantages
 Eliminates shutdowns and interruptions
 Eliminates annual inventory adjustment
 Trained personnel audit inventory accuracy
 Allows causes of errors to be identified and
corrected
 Maintains accurate inventory records
83
Independent Versus
Dependent Demand
 Independent demand - the
demand for item is independent
of the demand for any other
item in inventory
 Dependent demand - the
demand for item is dependent
upon the demand for some
other item in the inventory
84
Inventory Models for Independent
Demand
 Basic economic order quantity
 Production order quantity
 Quantity discount model
85
Basic EOQ Model
Economic order quantity is the level of
inventory that minimizes the total inventory holding
costs and ordering costs.
Assumptions :

The ordering cost is constant.

The rate of demand is constant

The lead time is fixed

The purchase price of the item is constant i.e no discount is available

The replenishment is made instantaneously, the whole batch is
delivered at once.
86
Reorder Points
 Inventory level of an item
which signals the need for placement of a
replenishment order., taking into account
the consumption of the item during order
lead time and the quantitu required for
safety stock.
87
Production Order Quantity Model
Used when units are produced
and sold simultaneously
88
Inventory level
Production Order Quantity Model
Part of inventory cycle during
which production (and usage)
is taking place
Demand part of cycle
with no production
Maximum
inventory
t
Time
89
Quantity Discount Models
 Reduced prices are often available when
larger quantities are purchased
TC =
D
Q
S+
H + PD
Q
2
90
Safety Stock
 Use safety stock to achieve a desired
service level and avoid stockouts
ROP = d x L + ss
91
Chapter 13 –
Aggregate Planning
92
Aggregate Planning
Aggregate planning is an operational activity
which does an aggregate plan for
the productions process, in advance of 2 to 18
months, to give an idea to management as to what
quantity of materials and other resources are to be
procured and when.
when
93
Aggregate Planning
Aggregate planning has certain prerequisite inputs which are
inevitable. They include:

Information about the resources and the facilities available.

Demans forecast for the period for which the planning has to
be done.

Cost of various alternatives and resources. This includes cost
of holding inventory, ordering cost, cost of production through
various production alternatives
94
The Planning Process
Long-range plans
(over one year)
Research and Development
New product plans
Capital investments
Facility location/expansion
Top
executives
Operations
managers
Intermediate-range plans
(3 to 18 months)
Sales planning
Production planning and budgeting
Setting employment, inventory,
subcontracting levels
Analyzing operating plans
Short-range plans
(up to 3 months)
Operations
managers,
supervisors,
foremen
Responsibility
Job assignments
Ordering
Job scheduling
Dispatching
Overtime
Part-time help
Planning tasks and horizon
95
Aggregate Planning Strategies
1. Use inventories to absorb changes in
demand
2. Accommodate changes by varying
workforce size
3. Use part-timers, overtime, or idle time to
absorb changes
4. Use subcontractors
5. Change prices or other factors to
influence demand
96
Aggregate Planning Options
Option
Advantages
Disadvantages
Changing inventory
levels
Changes in human
resources.
Inventory holding cost
may increase. Shortages
may result in lost sales.
Varying workforce
size by hiring or
layoffs
Avoids the costs of other
alternatives.
Hiring, layoff, and training
costs may be significant.
97
Aggregate Planning Options
Option
Advantages
Disadvantages
Varying
production rates
through
overtime or idle
time
Matches seasonal
fluctuations without
hiring/ training costs.
Overtime premiums; tired
workers; may not meet
demand.
Sub-contracting
Permits flexibility and
smoothing of the
firm’s output.
Loss of quality control;
reduced profits; loss of
future business.
98
Aggregate Planning Options
Option
Advantages
Disadvantages
Using partIs less costly and more
time workers flexible than full-time
workers.
High turnover/ training
costs; quality suffers;
scheduling difficult.
Influencing
demand
Uncertainty in
demand. Hard to
match demand to
supply exactly.
Tries to use excess
capacity. Discounts
draw new customers.
99
Aggregate Planning Options
Option
Back ordering
during highdemand periods
Advantages
May avoid overtime.
Keeps capacity
constant.
Disadvantages
Customer must be
willing to wait, but
goodwill is lost.
100
Summary of Aggregate Planning
Methods
Techniques
Graphical
methods
Transportation
method of linear
programming
Solution
Approaches
Important Aspects
Trial and error Simple to understand and
easy to use. Many
solutions; one chosen may
not be optimal.
Optimization
LP software available;
permits sensitivity analysis
and new constraints; linear
functions may not be
realistic.
101
Summary of Aggregate Planning
Methods
Techniques
Simulation
Solution
Approaches
Change
parameters
Important Aspects
Complex; may be difficult to
build and for managers to
understand.
102
Yield Management
Yield management, also known as revenue
management, is the process of understanding,
anticipating and influencing consumer behavior in order
to maximize revenue or profits
(such as airline seats or hotel room reservations)
The challenge is to sell the right resources to the right
customer at the right time for the right price.
103
Yield Management Matrix
Predictable
Unpredictable
Duration of use
Price
Tend to be fixed
Tend to be variable
Quadrant 1:
Quadrant 2:
Movies
Stadiums/arenas
Convention centers
Hotel meeting space
Hotels
Airlines
Rental cars
Cruise lines
Quadrant 3:
Quadrant 4:
Restaurants
Golf courses
Internet service
providers
Continuing care
hospitals
104
Chapter 14 –
Material Requirements
Planning (MRP) and ERP
105
MRP
Material Requirements Planning (MRP) is a
software based production planning and inventory
control system used to manage manufacturing
processes.
Benefits
1. Better response to customer orders
2. Faster response to market changes
3. Improved utilization of facilities and labor
4. Reduced inventory levels
106

An MRP system is intended to simultaneously meet
three objectives:

Ensure material and products are available for
productions and delivery to customers.
Maintain the lowest possible level of inventory.
Plan manufacturing activities and purchasing activities.


107
Dependent Demand
 The demand for one item is related
to the demand for another item
 In general, used whenever a
schedule can be established for an
item
 MRP is the common technique
108
Dependent Demand
Effective use of dependent demand
inventory models requires the
following
1.
2.
3.
4.
5.
Master production schedule
Specifications or bill of material
Inventory availability
Purchase orders outstanding
Lead times
109
Master Production Schedule (MPS)
 A Master Production Schedule (MPS) is a plan
for production, staffing, inventory, etc
 Specifies what is to be made and when
 Inputs from financial plans, customer demand,
engineering, supplier performance
 It helps to forecast demand, production costs,
inventory costs, lead time,
 The MPS is the result of the production
planning process
110
Master Production Schedule (MPS)
111
The Planning Process
Production
Capacity
Inventory
Marketing
Customer
demand
Procurement
Supplier
performance
Management
Return on
investment
Capital
Finance
Cash flow
Human resources
Manpower
planning
Aggregate
production
plan
Master production
schedule
Engineering
Design
completion
Change
production
plan?
Figure 14.1
112
The Planning Process
Master production
schedule
Change
requirements?
Change
master
production
schedule?
Material
requirements plan
Change
capacity?
Capacity
requirements plan
No
Realistic?
Yes
Is capacity
plan being
met?
Is
execution
meeting the
plan?
Execute capacity
plans
Execute
material plans
113
Focus for Different
Process Strategies
Make to Order
(Process Focus)
Number of
end items
Assemble to Order
or Forecast
(Repetitive)
Stock to Forecast
(Product Focus)
Schedule finished
product
Typical focus of the
master production
schedule
Schedule modules
Schedule orders
Number of
inputs
Examples:
Print shop
Machine shop
Fine-dining restaurant
Motorcycles
Autos, TVs
Fast-food restaurant
Steel, Beer, Bread
Lightbulbs
Paper
114
Master Production Schedule (MPS)
Can be expressed in any of the
following terms:
 A customer order in a job shop (maketo-order) company
 Modules in a repetitive (assemble-toorder or forecast) company
 An end item in a continuous (stock-toforecast) company
115
Bills of Material
 List of components, ingredients,
and materials needed to make
product
 Provides product structure
 Items above given level are called
parents
 Items below given level are called
children
116
Bills of Material
 Modular Bills
 Modules are not final products but
components that can be assembled
into multiple end items
 Can significantly simplify planning
and scheduling
117
Accurate Records
 Accurate inventory records are
absolutely required for MRP (or
any dependent demand system) to
operate correctly
 Generally MRP systems require
99% accuracy
 Outstanding purchase orders must
accurately reflect quantities and
scheduled receipts
118
Lead Times
 The time required to purchase,
produce, or assemble an item
 For production – the sum of the
order, wait, move, setup, store,
and run times
 For purchased items – the time
between the recognition of a need
and the availability of the item for
production
119
ERP

Enterprise resource planning (ERP) is a companywide computer software system used to manage and
coordinate all the resources, information, and functions
of a business from shared data stores.
120